Real Estate Investment (Introduction)
Introduction to Real Estate Investment
Real Estate investment is the purchase of property to generate income and value. It is important to understand the methods, benefits, regulations, and limitations of investing in Real Estate and REITs (Real Estate Investment Trusts).
Different Methods of Real Estate Investment
There are multiple ways that individuals and businesses can invest and profit in real estate, namely –
Owning Land (Becoming A Landlord)
Buying a plot of land or property is one of the most straightforward and common ways to become a landlord and invest in Real Estate today.
“Landlords grow rich in their sleep.” – John Stuart Mill
It provides you with possession of the title deed and all rights associated with the land or property.
Flipping Properties/Renovation for Sale
A common strategy in the field of Real Estate is flipping properties, i.e., buying commercial or domestic housing at rates that are undervalued, performing the required renovations and improvements to sell at a higher price.
The investor creates value by painting the property, adding features and amenities, and overall improving the state of the Real Estate as compared to how it was purchased.
Sources have shown that renovating and flipping Real Estate earns investors an average gross profit of 36.7% on their investment.
Investing in REITs (Real Estate Investment Trusts)
REITs are a great way for one to gain exposure to volatility and upward momentum in the value of the Real Estate market, without actually having to purchase any land or buy a house.
Instead, individuals and businesses can invest in REITs that allow investment appreciation and dividends in accordance with the housing and property market. An added benefit of REITs is that they are much more liquid than traditional brick-and-mortar Real Estate.
What Makes Real Estate A Lucrative Space for Investing?
Real Estate has performed consistently over time to provide reliable gains with moderate volatility.
While it does have a historical reputation of comparatively slower returns, Real Estate is a lucrative space for investors because it offers unmatched security in the fact that property is a real, tangible asset that can generate income while steadily appreciating in value.
“Ninety percent of all millionaires become so through owning real estate.” – Andrew Carnegie
Regulations and Limitations in Real Estate
While the issue of being matched with a buyer or seller is mostly mitigated in today’s digital world, the regulatory limitations still exist. In India, Real Estate is regulated by The Real Estate (Regulation and Development) Act, 2016.
Due to safety reasons, many countries have strict requirements for their citizens’ abilities to own property.
In addition, when it comes to investing in Real Estate, there are certain limitations to be aware of –
Less Liquid Than Stocks & Other Asset Classes
Housing and Commercial property are less liquid than other asset classes like stock and precious metals. This means that it is more complex to buy and sell because of legal and regulatory requirements.
Benefits of Investing in Real Estate
There are several benefits to investing in Real Estate –
Ability to Produce Rental Income
One of the most compelling reasons to invest in Real Estate is its potential to produce rental income.
Once a property is purchased, it can be rented or leased to house a third-party or provide commercial space for a business.
Considered a Safe Haven Asset
Real Estate can be viewed as a safe haven as compared to the volatility of stocks. The reason for this is because the housing market and REITs, as a whole, are less volatile than the stock market.
“The best investment on Earth is earth.” – Louis Glickman
Property Can be Used as Collateral
Real Estate can be used as collateral to obtain credit against the value of the property from banks and financial institutions.
Correlation Between Real Estate and Other Asset Classes
Research shows that while REITs and the stock market currently share a positive correlation, it varies wildly between a coefficient of 0 (no correlation) and 0.90, or a nearly perfect positive correlation, over time.
Overall, Real Estate and REITs are considered less volatile, reduced-risk investments because of their ability to hold value and their proven track record for stability.
Effect of Economic Downturn or Uncertainty on Real Estate
Real Estate is perceived as a safe haven asset in times of economic downturn. The graph above, depicts that while the market experiences periods of contraction, Real Estate sales are affected, however historically they have recovered rapidly.
Traditionally, in periods of uncertainty and recession, investors turn to real estate to provide them with the safety net of stability and reliability.
Benefits of Having Real Estate in Your Portfolio
- The Real Estate market has seen significant growth historically year-on-year.
- Residential and Commercial Real Estate can produce rental income regardless of market recessions.
- Less-than-perfect correlation with traditional asset classes, thus providing diversification benefits.
Characteristics That Make a Company an Ideal Real Estate Investment
When looking for a company to invest in, there are a few key things to look out for, namely –
- Proven track record.
- Potential to produce income.
- Estimation of value appreciation.
Once you have a good idea of a company’s past performance, it is easier to visualize the profit potential that your investment in the target company can create.
“Buy land, they aren’t making anymore of it.” – Mark Twain
Also, it is essential to take note of any government regulations that may apply to your investment and adhere to them.
When investing, the key is to be able to access as much information as to help you make an informed decision.
Housing and Commercial Real Estate are great investments known for their long term stability and significant profit potential.
We have seen how well Real Estate holds up during periods of market recessions, and that it is definitely worth investing in Real Estate for the long term.
REITs offer unmatched security because it gives exposure to capital appreciation in the value of Real Estate assets without needing to physically own the property. This helps investors avoid liquidity and capital issues while investing in the property market.